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Asia's New Giants

November 26, 1995

Special Report

ASIA'S NEW GIANTS

About an hour's drive outside of Hong Kong's posh Central District stands the nondescript headquarters of the colony's largest electronics company, VTech Holdings Ltd. Founded by Chairman and Chief Executive Allan C.Y. Wong, the company occupies three floors--some 130,000 square feet--in the no-frills Tai Ping Industrial Center. It's in this working-class neighborhood, where Wong, a 45-year-old U.S.-trained engineer, and his top four deputies, meet several times a week over dinner to plot strategy for the company's main lines of business: electronic toys, telecom gear, and computers.

The sheer size of the operation is a testimony to VTech's phenomenal success since its humble start in 1976. Back then, Wong rented space in a grimy textile factory building, where he and 40 others did everything from design to sweeping floors. His first invention was Pong Game, a crude interactive ping-pong game played on a TV set. Now, his eye-catching electronic educational toys have names like Talking Whiz Kid Genius and Smart StartSpeller, and they contain everything from keyboards to liquid crystal displays. The company boasts 15,000 employees, 800 of them engineers working in R&D centers from Irvine, Calif., to Dongguan, China. "It's a totally different game than when we were small," says Wong.

VTech is one of Asia's emerging giants. Throughout the region, hundreds of companies like it are rapidly gaining in size and stature. Some of them will become household names, as Japan's Sony Corp. and South Korea's Samsung group already have, while others will be content to dominate their niches worldwide. Increasingly, these will be the companies that Americans, Japanese, and Europeans will have to either compete against--or cooperate with.

Not all Asian companies are going to succeed, of course. Increased competition from established multinationals--as well as a trend toward more open markets in Hong Kong, Taiwan, and Southeast Asia--will hurt players that fail to alter their traditional paternalistic management style. For years, Asian companies have succeeded by riding a wave of double-digit economic growth. Overseas Chinese entrepreneurs who dominate the region's economies, for example, hold liquid assets conservatively estimated at $2 trillion. For them, constantly rising land prices, the ability to tap large pools of cheap labor, and an extensive network of personal connections were more important than advanced management methods.

But that era is fast ending. In the next phase, Asian companies will need to apply higher levels of technology, move into more service-sector activities, and establish regional dominance, if not truly global presences. Many face the task of streamlining their operations to become more internationally competitive. And they must achieve all this at a time when the family founders are passing the mantle of leadership over to the next generation.

RELAXED GRIP. Pulling off the transition requires nothing less than a management revolution. So even the most traditional family-run companies are beginning to recognize the need to relax the iron grip of their founders and start recruiting professional managers. "If they can't decentralize real decision-making in their organizations," says S. Gordon Redding, director of the University of Hong Kong Business School, "then they can't be a multinational."

There is surprising diversity in the way companies are responding to this challenge. Many family-run businesses that have evolved over the years into unwieldy conglomerates are wisely starting to focus on their core businesses (tables). Other big Asian businesses are forming strategic alliances with multinationals to gain access to higher levels of expertise and technology. Once-coddled state-run monopolies are listing on stock markets and overhauling their operations.

No one expects the new Asian giants to become copies of their Western competitors. More likely, the successful companies will be the ones whose management methods combine key ingredients from both East and West. They will try to merge traditional Eastern entrepreneurial spunk and rapid decision-making with Western managerial knowhow in everything from finance to high tech. They will become more transparent in their accounting and other business practices to attract outside capital but will avoid legalistic and bureaucratic structures. Another crucial balancing act will involve family control. Whereas Japanese business groups have largely passed into the hands of professional managers, the family-minded Chinese are likely to maintain key roles for sons--and some daughters.

But even if the founding families don't completely withdraw, they acknowledge they will need huge numbers of highly skilled managers and workers who can straddle Asian and Western cultures to pull off the transition to the future. Trouble is, such employees are in extremely short supply. "Finding the right people is always a difficult task," says Edmond Ip, managing director of Singapore-based CDL Hotels International Ltd., which is trying to build a global brand for its web of newly acquired hotels. As a result, business schools are expanding throughout Asia. Not to miss out on the action, Western business consultants and headhunters are flocking to the region to help meet the managerial needs of the emerging giants.

The reason the need is so acute is that many large companies still have organizational structures suited for small, nimble businesses--not conglomerates. The founding patriarch makes all important decisions, and he prefers loyalty over expertise, relatives over professionals. "The Chinese way is to control everything," explains Stan Shih, founder and chairman of computer maker Acer Inc., who by contrast prefers a "flat" U.S. model that empowers workers. "Their idea of success is more control."

Sometimes that style results in family battles, which prove crippling. The Jumabhoys, for example, owner of Scotts Holdings, a $284 million property company in Singapore, are now wracked by family warfare as various relatives jockey for control. In Taiwan, the founding family of the powerful $9.1 billion Formosa Plastics Corp. is also in turmoil. Winston Wang and his father Wang Yung-ching are at odds after the press reported the married Winston was having an affair with a graduate student. Now, it's doubtful that Winston, long identified as the heir apparent, will succeed his father--though Winston is credited with professionalizing the company.

Also spurring companies to improve their management is the move toward freer trade sweeping the region. As members of the World Trade Organization, Asian countries are being forced to gradually drop trade barriers and liberalize their economies. Deregulation is washing over Asia as countries vie for the foreign investment and human resources needed to upgrade such key sectors as telecommunications and transportation. That's the real significance of the meeting of the Asia-Pacific Economic Cooperation (APEC) forum in Osaka beginning on Nov. 15 and culminating with a heads-of-state summit on Nov. 19. The direction toward reducing trade barriers is clear. "This is a real wake-up call to Asia business," says Robert C. Moeller, vice-president of Booz, Allen & Hamilton Inc. in Singapore.

"NO MONOPOLIES ANYMORE." In this more open climate, Asian companies won't be able to rely so heavily on their guanxi, or connections, privileged information, and crony networks. That old style may still help win deals in such emerging economies as China and Vietnam, but connections just aren't what they used to be as Asian markets become more demanding and more sophisticated. "Before, guanxi was the driving factor. Now, it's just one of them," says Trevor MacMurray, director of McKinsey & Co. in Hong Kong. "You won't succeed without it, but it's not enough in itself."

Another reason guanxi doesn't work as well is that more Asian companies are moving into consumer goods and services aimed at broader audiences. Citibank, for example, competes in consumer banking not so much against other American banks but more with the likes of Thai Farmers Bank and Taiwan's Chinatrust Co. These financial institutions have no choice but to offer the same ease of banking through automated teller machines that Citibank does.

So even if a corporate patriarch hands his son a coveted business, "the son has to create happy customers. Otherwise, the customers will protest and won't pay their bills," says Y.Y. Wong, founder of Wywy Group, a $900 million marketing and distribution company in Singapore. "There are no monopolies anymore."

WORDS TO HAUNT. Ultimately the challenge of managing Asia's new giants falls to the next generation. The big question is whether the sons and daughters are up to the task. There's a telling expression in Chinese: A family's wealth won't last three generations. "Many of my clients are spending sleepless nights worrying their empires will fall overnight," says Robert K.G. Chia, an independent management consultant in Singapore.

Next-generation managers moving to the top often were educated at first-rank U.S. business schools, and many have lived abroad for years. Take William K. Fung. He and brother Victor run Li & Fung Ltd., an export trading company founded in 1906 by their grandfather. Having just recently acquired Inchcape Buying Services, they have now transformed an old-style Chinese company into a $1.5 billion trading corporation. Instead of being limited to low-end manufacturing, it concentrates on design, marketing, distribution, and other value-added functions.

They have also extended their geographic region beyond Asia. Their publicly listed company now boasts 25 offices throughout the world, with 2,200 employees (and no other Fungs among them). With a flat organizational structure, broken into strategic business units, the Fungs can provide high-quality goods at low cost by sourcing and manufacturing throughout Asia.

William first ushered in changes when he was summoned home in 1972 to help with the family business. He had just received an MBA from Harvard University. The business was crawling with relatives: Fung's father had 10 siblings, and many of them were at Li & Fung. William complained about the nepotism. "Look, William, I sent you to the best schools in America," he recalls his father saying. "Tell me what to do."

So the brash 23-year-old conducted a Harvard case study on his family company. The results: Take Li & Fung public as a way to separate ownership and management. "To his great credit, my father did it," William says. Cousins who hated the business suddenly bailed out. Other relatives held shares, got regular dividends, but were out of management. "If you want to put your house in order, take your company public," William says. In 1989, the brothers took the business private and bought out the rest of the family. Then, they streamlined it and relisted it in 1992.

QUICK STUDY. Although Hong Kong, Singapore, and Taiwan companies probably have a head start in shaking up their managements, the message is also being heard throughout Southeast Asia. Take Indonesian entrepreneur Sukanto Tanoto, 46, whose parents came from China. When Tanoto starts up a business, he immediately brings in experienced personnel from around the globe to manage it. As the founder of $1 billion Raja Garuda Mas, which makes plywood, pulp, paper, rayon, and palm oil, Tanoto prides himself on "entering businesses ahead of the competition."

A high school graduate, Tanoto worked for his father's construction supplies company before he became the first in Indonesia to open a plywood factory 20 year ago. He also started up a lucrative palm oil business by hiring English and Scottish experts who had left Malaysia during a nationalistic period in the early '80s. To manage his investments, Tanoto has brought in Americans, Canadians, and Swedes. In all, he has some 150 non-Indonesian staffers working at the companies. In March, he raised $150 million by floating Asia Pacific Resources International Holdings Ltd., the pulp, paper, and rayon part of his business, on the New York Stock Exchange.

This blending of East and West is particularly pronounced in technology companies throughout the region. In Taiwan, $3.2 billion Acer Group is unique. For its first 13 years starting in 1975, Acer was run like a traditional top-down Taiwanese company. But in 1988, Acer Chairman Shih hired a senior IBM executive to streamline his company. The effort failed because the executive forced "consensus" on the local management, leaving no room for disagreement.

Since 1991, Shih has found a middle ground that works: The emphasis is now on giving autonomy to individual business units that can still draw on the company's strategic groups for new technologies. Shih's goal is to have 21 publicly listed Acer companies. Although decision-making is decentralized, Shih fosters a strong Acer culture that helps hold these confederated companies together. "All management teams have to have a common interest with you," he says.

Like Acer, Taiwan Semiconductor Manufacturing Co. has found a blend of a little East and a lot of West that works. The company is the brainchild of visionary Morris Chang, a well-known chip engineer in the U.S. before he tried to start a Taiwanese venture. Chang saw the need for a foundry business and persuaded the government in 1987 to support the project--not an easy sell when the semiconductor business was in a worldwide slump. Philips Electronics joined in and currently holds a 35% stake.

With his strong U.S. schooling and 25 years at Texas Instruments Inc., Chang takes an American-style company as his model. Indeed, his president is Texan Donald W. Brooks, a colleague for 22 years at Texas Instruments. Why choose an American for a top slot at a Taiwan-based company? Since 55% of TSMC's market is in the U.S., while 20% more is in Europe, "our customers, I believe, feel quite at home with Don," says Chang.

But TSMC is careful not to go overboard in adopting U.S. practices. The company doesn't want to "use too many systems and procedures and become bureaucratic," Brooks says. The two have a very informal way of decision-making as well. "He doesn't write reports to me," says Chang. "We talk almost every day. We've got an American culture, though the people below us are basically Taiwanese."

One way to quickly obtain managerial knowhow and technology is to form a strategic alliance, something Thailand's largest conglomerate, Charoen Pokphand Group Co., has developed into a fine art. Its joint venture with New York-based Nynex Corp., called TelecomAsia Corp., has landed a contract to install 2 million new phones lines in Bangkok. It's also getting into related services such as dedicated leased lines, voice mail, and stored data. And TelecomAsia is moving overseas: In the Philippines, it has already secured a contract to install 300,000 lines with Nynex. It also has a cellular phone deal in China.

At first, the Thais relied heavily on Nynex for technology and to start up departments for network design, quality control, supervision of contractors, and government relations. Thai managers, working with Nynex, have assumed greater responsibilities as they rotate through a variety of posts. The venture is giving them training to become general managers for similar telecom projects to be launched throughout Asia, says Ajva Taulananda, president of TelecomAsia.

These alliances are proliferating throughout Southeast Asia. Indonesia's Lippo Group has them with Mitsubishi, Philips, Fuji Insurance, and Alexander Insurance. As partners, the Asians offer access to markets, capital, and the ability to manage local labor, while the multinationals bring in technology and management knowhow. "It's a very fertile combination, complementary rather than combative--and a genuine matching of needs," says Redding.

Even companies that get the right management mix and the latest technologies, however, face another crucial task: zeroing in on a sharp business focus. Many traditional Chinese owners who have built conglomerates refuse to sell off acquisitions as a matter of face. It's an admission their group isn't faring well. Indonesia's sprawling Salim Group, for example, owns some 400 companies, which it is now in the process of streamlining.

GOOD RIDDANCE. Malaysia's Renong--a group of eight listed companies that accounts for more than 4% of the market capitalization on the Kuala Lumpur exchange--also is wrestling with how to focus. Aside from its infrastructure companies, it had the country's largest chain of hotels and controlling stakes in the biggest publishing house and in a private TV station. In 1993, Renong started to concentrate on infrastructure, selling off its publishing and media interests for $320 million. "To be honest, we are glad to be rid of them," says Halim Saad, Renong's executive chairman. "It didn't fit into our total mission." His managers now realize that it's better to be an infrastructure powerhouse than a hodgepodge of investments.

Fund managers who comb the region for investment opportunities say a company's ability to decide where to concentrate and then to stick with it is crucial to sorting out eventual winners from losers. "The purer the company and the clearer its strategy, the more the stock market will reward it," says Laura E. Luckyn-Malone, who manages $3.5 billion in Pacific Rim money for Schroder Capital Management Inc. "If a company can't tell me what its strategic plan is, why should I put my shareholders' money in it?"

EVOLVING CAPITALISM. There's no doubt the Asian giants that have their managerial acts together will power their way into the 21st century. In so doing, the very nature of Asian capitalism will evolve from the robber-baron era into a distinctive blend of the world's best managerial and technological knowhow. The companies that make the leap to global status will be able to both fend off multinationals at home and compete fiercely with them in the region's booming markets. Some will penetrate more deeply into the U.S., Europe, and Japan, raising competitive pressures in those countries.

Certainly, the progress that Asia's best companies are showing in improving their management and moving into new industries holds out the promise that economic momentum will continue to build up in the region. "They're lean and mean, cost-effective, and intuitive," says James B. Haybyrne, chairman of Strategic Thinking Group, a management consultancy based in Hong Kong.

The ability of these companies to break out of the cheap-labor and asset-shuffling stage of capitalism will be of utmost significance. If they manage to do so, these companies will be unleashing innovation and creativity that could raise the quality of Asia's economic activity to levels on a par with those elsewhere in the industrialized world. That's why the dynamos that succeed in marrying their Eastern traits with modern Western management are so important to Asia's future.By Joyce Barnathan in Hong Kong, with Pete Engardio in Singapore, John Winzenburg in Taipei, and bureau reports